Analysts Are Not Bothered By Seagate's Additional Taxes

Shares of Seagate Technology PLC STX have dropped slightly since December 31, when the company agreed to pay an extra $200 million in taxes to China’s Jiangsu Province to settle an auditing issue regarding tax and interest.

The 8-K form filed with the SEC explained that Seagate “will record approximately $200 million in additional tax expense associated with the assessment in its 2nd quarter, fiscal year 2015. The cash payment of approximately $230 million for the assessment will occur in its 3rd quarter, fiscal 2015.”

Seagate is an international data storage company with headquarters in California, though it is incorporated in Ireland. The company produces hard drives, software, and data protection tools for both personal and corporate use.

At the CES Conference this week, Seagate revealed that its new Personal Cloud drive also has Plex capabilities. Plex is a server that streamlines media that organizes the user’s movies, music, photos and devices.

On January 5, analyst Richard Kugele of Needham & Co. reiterated a Buy rating on Seagate with a $67 price target. Kugele noted: “The actual cash expenditure is likely to occur in the calendar March quarter (current quarter) and the incremental tax charge… won’t impact our December quarter estimates.”

The analyst warned that in the near-term, “quarterly tax level for the company may tick slightly closer to the ~$20M/quarter range from our current $15M” but “the greater clarity provided through these tax jurisdiction discussions may create opportunities to actually decrease the tax rate over the longer-term.”

Kugele concluded: “With stronger high-cap demand (and the resulting beneficial margin profile) it is possible that the various puts and takes of the upcoming quarter may negate any EPS impact. Therefore we are not changing any estimates at this time.”

On the whole, Kuglele views the “tax issue as a minor one given the company’s worldwide advantaged tax structure (as an Irish company) and their strong cash balance and cash flow.”

Richard Kugele has a 71 percent success rate rating stocks in the past year with a +15.9 percent average return per recommendation.

Separately on January 5, analyst Amit Daryanani of RBC Capital reiterated an Outperform rating with a $69 price target. Daryanani did not see the additional taxes as a large setback, noting: “While the $200M in back taxes will act as a near-term balance sheet headwind, we believe [Seagate] will continue to generate ~$2B in annual cash flow per year.”

He continued: “With this in mind, [Seagate] will continue to offer a solid capital allocation program (~3.3% dividend yield) and maintain its buyback optionality (STX to protect shares in the low $60s). STX currently has $2.7B of cash on hand and will likely see that number get to >$3.0B by end of FY15 despite the $200M back-tax payment.”

Amit Daryanani has a 65 percent overall success rate rating stocks from the past year with a +9.1 percent average return per recommendation.

On average, the top analyst consensus for STX on TipRanks is Moderate Buy.